Conflicting inflation data in the United Kingdom pressured the British currency. Although many components of the release printed in the green, traders interpreted the result as unfavorable for sterling, and GBP/USD fell into the 34-figure area. While the price decline largely reflected greenback strength, the release confirmed the pound's vulnerability and intensified pressure on the pair; the market read the published numbers as signs of stagflation.

Thus, according to the published data, the headline consumer price index rose 0.7% month-on-month in March (forecast 0.6%). That represents the strongest monthly pace since April last year. On a year-on-year basis headline CPI rose as expected to 3.3% (the fastest pace since December last year).

However, the core consumer price index, which excludes energy and food, unexpectedly slowed to 3.1% after rising to 3.2% in the prior month; most analysts had expected the measure to remain at the February level.

By contrast, the retail price index, which employers use in wage discussions, printed in the green. After two months of decline (it dropped to 3.6% in February) RPI jumped to 4.1% year-on-year, above the 3.9% forecast.

Other inflation gauges also accelerated materially. For example, the input PPI hit a multi-year high, jumping to 5.4% year on year in March; by comparison, it oscillated in a -1.3% to +1.1% range over the past year. Producer output prices also accelerated to 2.6% after four consecutive months of deceleration (they stood at 1.8% in February).

As we see, March's result looks quite mixed. Perhaps the main surprise here came from slowing core inflation. That signal tells the market that price growth stems not from domestic demand but from external shocks, primarily the energy crisis. Consequently, the Bank of England has every reason to view the March inflation spike as transitory. In other words, headline CPI is unlikely to force a material shift in the regulator's stance.

On the contrary, yesterday's report may soften the central bank's rhetoric, because imported inflation hits households' pockets and restrains economic growth. As noted above, the rise in headline inflation reflects mainly a surge in gasoline and diesel prices amid the Middle East conflict. Higher pump prices and rising energy bills literally erode household incomes. Against this backdrop the IMF already cut its UK growth forecast for the year to 0.8% from the prior 1.3%.

A classic stagflation configuration is taking shape: high headline inflation alongside slowing economic growth. That combination raises the risk that the economy will fall into a stagflation trap.

Under these conditions, the Bank of England will almost certainly remain on hold and is unlikely to harden its rhetoric, especially given the persistent weakness in the UK labor market. Recall that, according to data published the day before yesterday, weekly initial jobless claims rose to 26.8 thousand (forecast 21.4 thousand). That increase marks the fifth consecutive month of upward dynamics. The unemployment rate fell to 4.9%, but the key driver of that decline proved to be people leaving the labor force: economic inactivity rose to 21%. In addition, February recorded the slowest wage growth since late 2020 (pay rose only 3.8% including bonuses and 3.6% excluding bonuses).

Thus, the macro releases on inflation and the labor market published this week did not support the pound, despite the green readings in some components. Headline inflation rises do not coincide with economic optimism and instead raise recession risks — they constrain the Bank of England's hands — while unemployment falls because economic inactivity increases.

From a technical standpoint, GBP/USD sits inside the Kumo cloud on the H4 and D1 charts. On the H4 timeframe, the price lies between the middle and lower Bollinger Bands and on the Tenkan-sen line but beneath Kijun-sen. On the D1 timeframe, the price sits between the middle and upper Bollinger Bands and above both Tenkan-sen and Kijun-sen. All this points to persistent uncertainty. Consider short positions only after the pair confirms a close below support at 1.3480 (the lower Bollinger Band on the H4 chart); in that case the next downside target would be 1.3410 (the lower Kumo boundary on D1). Longs on the pair look too risky given ongoing and intensifying geopolitical risks.